Lecture Notes: Lifetime Value of a Customer (LTV)

Introduction

• Presenter: Dr. Adam Jae Bok
• Topic: Understanding the Lifetime Value (LTV) of a Customer
• Importance: Helps businesses determine the total worth of a customer over time.
  • Involves repeat purchases, cross-selling, and ongoing customer interactions.

Concept of Lifetime Value (LTV)

• Definition: Total profit from a customer over their interaction period with the company.
• Key Components:
  • Initial product or service sale
  • Repeat purchases or accessories
  • Cross-selling opportunities

Example Calculation

• Generic Product:
  • Sale Price: $100
  • Cost: $75
  • Product Profit: $25
• Supplies:
  • Monthly Price: $4
  • Monthly Profit: $2
  • Duration: 36 months
  • Total Supplies Profit: $2/month * 36 months = $72
• Total Lifetime Profit:
  • Product Profit: $25
  • Supplies Profit: $72
  • Total LTV: $97*

Real Finance Considerations

• More sophisticated calculations involve:
  • Cost of Capital
  • Discounted Cash Flow
• These topics are advanced and not required for this course.

Importance for Small Businesses

• Link Between Costs:
  • Cost of Customer Acquisition (COCA) vs. Lifetime Value (LTV)
  • Vital for assessing business viability.

Business Viability

• Viable Business:
  • COCA < LTV
  • Example: COCA = $50, LTV = $97
  • Profit per Customer: $97 - $50 = $47
• Non-viable Business:
  • COCA > LTV

Assigned Activity

• Scenario: Gym Membership
  • Initiation Fee: $0
  • COCA: $25
  • Monthly Fee: $10 (assumed all profit)
  • Customer Duration: 18 months
  • Task: Calculate LTV for this scenario.

Improving Metrics

• Aim: Improve COCA and LTV
  • Reduce COCA and increase LTV
  • Methods: A/B testing, targeting profitable customers, extending customer lifetime
  • Example: Offering reduced fees to retain customers

Importance for Start-ups

• For investment: Investors require LTV and COCA calculations.
• Administrative costs impact LTV; ensure LTV is much higher than COCA for sustainability.